Ethiopia construction boom lays foundation for growth

Addis Ababa’s strategy of pouring funds into infrastructure is geared toward attaining middle-income status in 11 years, but experts say betting too heavily on construction may cause the plan to backfire

By Jenny Vaughan / AFP, ADDIS ABABA

A man on Jan. 15 walks past a part of the Addis Ababa Light Railway system being built in the Ethiopian capital. The rail network project was contracted by China Railway Group Ltd and is set to comprise 41 stations.

Photo: AFP

A bove Addis Ababa’s concrete skyline, cranes tower high amid blasts from nearby drills and diggers. At the feet of buildings shrouded in bamboo scaffolding, excavators dig up dirt tracks, to be replaced by paved roads and a modern railway.

It is a scene common to most neighborhoods in the Ethiopian capital, which has turned into a giant building zone as it undergoes a transformation.

“It looks like a construction site when we compare from the previous time,” said Berhanu Kassa, manager of B.B. Construction in the booming city.

“Especially in the past five years, it’s a really big change,” he added, speaking at the site of his latest project, a mixed-use commercial building on one of the city’s main thoroughfares.

Addis Ababa’s construction boom — funded both from private and public coffers — is being driven by the country’s recent rapid economic growth.

However, the government hopes it will attract further investment and help industrialize the economy so Ethiopia can reach middle-income status by 2025.

The public works projects, worth billions of dollars, include new roads, railways and massive power generation schemes across the country.

Meanwhile, the majority of new buildings are owned by private investors, who by law must be Ethiopian citizens. The development promises to boost economic growth, which was officially 9.7 percent last year, although the IMF pegs it at closer to 7 percent.

“The basic engine blocks of economic transformation are the infrastructure,” Ernst & Young Ethiopia managing partner Zemedeneh Negatu said. “The Achilles heel of Africa is power — lack of power, lack of road networks, lack of the basic needs that you need to transform your economy.”

Yet analysts say the construction boom is also a symptom of the financial system’s weakness, which leaves the business community with few investment opportunities outside of the sector.

“This is the most attractive investment opportunity in the country for the time being since we do not have a financial market that is working properly,” said Jan Mikkelsen, head of the IMF’s mission in Ethiopia.

“There’s no financial markets, no stock exchange, so real estate investments seem to be the most attractive from that point of view,” Mikkelsen added.

The majority of the new buildings are hotels, apartments and offices, most of which are being built by Ethiopian-owned construction firms, although foreign-owned contractors from China or Turkey are cashing in too.

The government said the big push in the sector — which is bolstered by state-led incentives such as tax breaks and ready access to land — is driven by the need to create jobs for Ethiopia’s 91 million people, about one in four of whom are unemployed.

“We are struggling to eradicate poverty and create jobs,” State Minister for Urban Development and Construction Desalegne Ambaw said.

Officials say 4 million jobs were created in the past three years, including an increase in construction sector employment. Yet Mikkelsen warns that resources should not be pooled too heavily into infrastructure projects, no matter how crucial.

“There is a need for construction, but of course there’s a limit to how much you can get out of that and these are potential resources that could have been used for other means and maybe more export-oriented businesses as well, given that there is an urgent need for more foreign exchange,” he said.